Tensions Flare in Puerto Rico’s Debt Battle

Disgruntled students from the University of Puerto Rico took to the streets of San Juan last Wednesday to protest a government plan to slash their school’s funding by some $166 million. The spending cuts formed part of a $1.5 billion austerity program that the island’s governor, Alejandro García Padilla, had hoped to implement in order to put a dent in the territory’s whooping $72 billion debt and calm nervous foreign investors with a stake in Puerto Rico’s financial solvency.

Heated confrontations between the demonstrators and police, as well as a bomb scare at the governor’s mansion, prompted García Padilla to abandon some of the controversial cuts by Thursday. He subsequently met with Puerto Rican legislators and drew up a revised, more revenue-centered, budgetary plan in an effort to salvage the larger austerity package. The new plan increases the island’s sales tax by 4.5 percent and introduces a new value added tax of 4 percent on goods and services that were previously exempted from such dues. Tax increases aside, the replacement proposal includes $500 million in painful public spending cuts as well. Whether the government will be able to implement the austerity measures in the face of almost certain public backlash remains to be seen.

Puerto Rico’s ongoing debt crisis has already led to 150 school closings in the past five years. According to the government’s own estimates, 600 schools may face closure in the next five years if the territory’s fiscal situation doesn’t improve.

Puerto Rico’s Education Secretary, Rafael Román, pointed to the mass exodus of tens of thousands of Puerto Ricans in recent years as a major factor in the government’s decision to move ahead with school closings. Puerto Rico’s 3.5 million population has shrunk by a staggering 7 percent over the last decade and is projected to contract by a further 0.6 percent this year alone.

A significant portion of the people leaving Puerto Rico are doing so in reaction to the island’s deep and longstanding recession. They’re fleeing the Puerto Rico’s 44 percent poverty rate and its 14 percent unemployment rate (the latter figure, which is double the U.S. mainland’s rate, is likely vastly understated given its failure to account for those who’ve simply dropped out of the labor market). Given the territory’s dire fiscal situation, prospects for economic growth in the near future remain dim.

Many have pointed to the Puerto Rican government’s stubborn austerity fixation as the primary cause of its depopulation and enduring recession. In 2009, then-governor Luis Fortuño, a supply-side oriented member of the Puerto Rican Republican Party, laid off 17,000 public employees and effectively nullified collective bargaining rights as well as existing, and future, union contracts in an effort to please foreign creditors and avoid a government shutdown. His parallel corporate tax rate reductions, designed to attracted investment in Puerto Rico, utterly failed to offset the significant economic harm caused by these cuts. Although the territory’s current governor is from the comparatively less right-wing Popular Democratic Party, he has embraced similar austerity initiatives in addressing Puerto Rico’s debt obligations.